Empirical Models of Exchange-Rate Determination: Picking Up the Pieces

Timothy D. Lane
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Timothy D. Lane: International Monetary Fund, Postal: 700 19th Street, N.W., Washington, D.C. 20431, http://www.imf.org/

Economia Internazionale / International Economics, 1991, vol. 44, issue 2-3, 210-227

Abstract: This paper takes as its starting point the recent empirical literature on exchange rate determination. Not only have monetary models failed to explain short-run exchange-rate movements, but there is evidence of non-stationary drift of exchange rates in relation to the course predicted by the monetary model. In this paper, a simple theoretical model is presented which is a variant of the familiar IS-LM model with gradual adjustment of prices. It is shown that this model predicts dynamic behavior of exchange rates and ether related variables which is qualitatively similar to the behavior found in recent empirical studies, but is unlike the behavior implied by monetary models of the exchange rate.

Date: 1991
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